Two longtime fiduciary advocates make a pitch for family offices to sign on to standards

Responding to Ponzi-scheme scandals that have called into question the professionalism of advisors serving the ultra-wealthy, two long-time advocates for the fiduciary standard are forming an institute to establish standards for family offices.

Don Trone and Charles Lowenhaupt are working together to establish the Institute for Wealth Management Standards, which will be located in Geneva. The standards are designed to be international, aimed at the $100 billion family office market, which is in flux after the financial crisis. Not only are many wealthy families giving new scrutiny to advisors, but many are determining whether they can afford to maintain offices.

The turbulence could be an opportunity for advisors, who may be able to sell a well-thought out value proposition that combines wisdom and good processes, say the two men. Some advisors may be able to establish businesses serving multiple family offices; others may be able to benefit as families seek to change their service providers.

The two men started working on their project after the Bernie Madoff scandal became public; they are beginning to publicize it just as Kenneth Starr, a celebrity wealth advisors, has been charged with fraud for allegedly operating a Ponzi scheme.

The team held a breakfast roundtable at a Family Office Exchange forum last fall, according to Ruth Easterling, managing director of member services. “Quite a few people signed up,” she said. “Family offices wanted to hear more about the standards.”

Kenneth Starr fallout

Interest in the initiative may surge yet again, with the latest scandal to hit the family office business: Kenneth Starr, an investment advisor with clients that reportedly included Wesley Snipes and Sylvester Stallone, was arrested last week and charged with fraud.

Family offices that signed on to the standards Trone and Lowenhaupt are espousing for family offices would no doubt stand a better chance of avoiding Ponzi-type scams. Some of the standards are basic, such as:

“The Standards Director prepares, monitors, and maintains a written statement … which defines the Wealth Holder’s goals and objectives … “

The Standards Director would be someone within the family office charged with making sure service providers meet standards. Other standards proposed by the two men are more controversial, such as a set of screens and evaluations for advisors and one that calls for advisors not to maintain custody of their clients assets.

“As a best practice, custodians are independent of Investment Managers, except as may be required by trust law, or by the necessity of employing a commingled investment vehicle.”

There are 15 standards in all, designed to conform to different systems of laws, such as British Commonwealth law, Napoleonic law and Sharia, reflecting the fact that the estimated 22,000 families with $100 million or more in wealthy are located around the globe.

Investment advice is a commodity; wisdom is not

Lowenhaupt and Trone have posted the standards online here and hope to get comments and suggestions.

Lowenhaupt is founder of Lownhaupt Global Advisors, which has offices in New York, St. Louis and Australia; Trone is chief executive of Connecticut-based consulting firm Strategic Ethos.

About 150 people have commented on the proposed standards so far, Trone says. The duo hopes to publicize the standards for about two years.

They need a funder to take the next step in the process: consolidating the comments, revising the standards, appointing a board of directors and beginning to certify individuals to the standards.

They believe that in order for the standards to become the norm, wealthy families must embrace them and insist that their advisors and other service providers abide by them.

But, support could come from within the advisory community as well. In Lowenhaupt’s eyes, standards are essential if investment advisors are going to make a case for the value of their services to wealthy individuals.

“Investment advice is being commoditized,” he says, pointing to the rise of mutual funds and ETFs. In addition, the crisis of 2008 made it harder than ever to argue for a particular investment strategy, when so many of them failed.

Rather than their prowess at stock-picking or investment strategies, Lowenhaupt argues that an advisor needs to be able to make a case that they offer wisdom.

“What was really clear after 2008 was that diligence and process were the gold standard,” he said.

He further boils that down to two ideas: first, that an advisor can offer a value proposition by building a kind of “wisdom bank” offering family offices access to top-notch service providers; and second, that an advisor can offer to help a family build systems. See: Look before you leap: Six questions you must consider before becoming a multifamily office

That’s where the new Institute comes in.

“I was terribly troubled (after the scandals),” says Lowenhaupt. His firm, Lownhaupt Global Advisors serves 4-6 families. The firm is affliated with a law firm, Lowenhaupt & Chasnoff, LLC, the first U.S. law firm to concentrate in tax law and established by Lowenhaupt’s grandfather in 1908. Combined, the firms employ about 25 people.

Lowenhaupt and his team came up with 15 principles for wealth management, but realized that to make them useful, the principles had to be extended into standards, which wealthy families could apply when picking and employing wealth managers.

Lowenhaupt enlisted Don Trone, with whom he had worked at the Foundation for Fiduciary Studies.

Post-Madoff, this is an easier sell

Don Trone says his fiduciary speeches
"went over like a lead balloon"
pre-Madoff

Trone, for his part, had been making the argument for years that wealthy families ought to be paying attention to standards, especially the fiduciary standard.

He was often invited to speak at conferences, where he found himself “wedged in between two hedge fund managers promising double-digit return and no risk.”

“My speech went over like a lead balloon,” he says.

Since Bernie Madoff, the conversation is entirely different, he says.

He believes adopting standards within the profession may forestall legislative action or a hodge-podge of regulation sparked by the scandals.